Q1DC
Question
Power Switch, Inc. designs and manufactures switches used in telecommunications. Serious flooding throughout North Carolina affected Power Switch’s facilities. Inventory was completely ruined, and the company’s computer system, including all accounting records, was destroyed.
Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory. He is standing in what is left of the accounting department with Paul Lopez, the cost accountant.
“I didn’t know mud could smell so bad,” Paul says. “What should I be looking for?”
“Don’t worry about beginning inventory numbers,” responds Stephen, “we’ll get them from last year’s annual report. We need first-quarter cost data.”
“I was working on the first-quarter results just before the storm hit,” Paul says. “Look, my report is still in my desk drawer. All I can make out is that for the first quarter, direct material purchases were \(476,000 and direct labor, manufacturing overhead, and total manufacturing costs to account for were \)505,000, \(245,000, and \)1,425,000, respectively. Wait! Cost of goods available for sale was \(1,340,000.”
“Great,” says Stephen. “I remember that sales for the period were approximately \)1,700,000. Given our gross profit of 30%, that’s all you should need.”
Paul is not sure about that but decides to see what he can do with this information. The beginning inventory numbers were:
• Direct Materials, \(113,000
• Work-in-Process, \)229,000
• Finished Goods, $154,000
Requirements
1. Prepare a schedule showing each inventory account and the increases and decreases to each account. Use it to determine the ending inventories of Direct Materials, Work-in-Process, and Finished Goods.
2. Itemize a list of the cost of inventory lost.
Step-by-Step Solution
VerifiedThe flows of costs schedule are prepared as per the requirement and the inventory lost is $532,000.
| Powerswitch Inc. | ||
| Flow of costs Schedule | ||
| For the 1st quarter | ||
Raw material Inventory | Work-in-process Inventory | Finished Goods Inventory |
|
|
|
Beginning DM $113,000 | Beginning WIP $229,000 | Beginning FG $154,000 |
+ Purchase of DM 476,000 | +DM used 446,000 | +COGM 1,186,000 |
DM available for use 589,000 | +DL 505,000 | Cost of goods available for sales 1,134,000 |
-Ending DM 143,000 | +MOH 245,000 | -Ending FG 150,000 |
DM Used $446,000 | Total manufacturing cost to account for 1,425,000 | COGS $1,190,000 |
| -Ending WIP 239,000 |
|
| COGM 1,186,000 |
|
|
|
|
Working notes: Calculations
Direct Materials | $143,000 |
WIP inventory | 239,000 |
Finished goods inventory | 150,000 |
Total inventory | $532,000 |